Medicaid Managed Care Leaves $1 Billion Hole in California Budget

California lawmakers are staring down a $1.1 billion hole in next year’s health budget after failing to come up with a way to replace the state’s “managed care organization tax” on health insurance plans that serve Medi-Cal managed care recipients.

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It’s a hole big enough that state Gov. Jerry Brown recently used it as a reason to veto 15 health care and other bills sent to him by the state legislature. And unless it’s filled, Brown, a Democrat, is expected to issue a preliminary state budget in January with sizeable cuts to health and human services programs.

So far, the governor’s efforts to fill the void haven’t paid off. Brown in June had called a special legislative session to find other revenues to replace the tax, which the federal government says doesn’t meet regulations. That session is ongoing, and an informational hearing on the managed care organization tax is scheduled for Dec. 1 in Los Angeles, but getting everyone back to the negotiation table is proving difficult.

At the same time, state officials face other pressures on their Medi-Cal program, which has a total budget of $91.6 billion. After much delay, health officials only recently came to agreement in principle with the federal government on how to fund reforms in Medi-Cal services. And federal officials approved less than half the $17 billion the state had originally sought.

Some observers say they don’t expect a deal on the managed care organization tax until the middle of next year, when federal officials have said the tax must end. While there may be closed-door discussions between insurers and state officials to find a solution, no one will talk publicly about them.

“In some ways, people are willing to walk away right now because they still have time,” said Shannon McConville, research associate at the Public Policy Institute of California.

The prospect of more than billion in budget cuts, however, could provide motivation for a deal.

“It’s unfortunate we got to this place, but when the governor’s budget comes out, there will be tremendous pressure” to fix the tax issue, said Maya Altman, CEO of Health Plan of San Mateo, which serves Medi-Cal managed care recipients.

She said budget cuts could make it difficult to raise already-low reimbursement rates for doctors, and almost certainly would reduce services for developmentally delayed children, the elderly and the disabled.

The problem is, the way California is taxing health care insurers and providers may be illegal under federal law. For years, the state has required managed care plans serving Medi-Cal recipients to pay a special health care tax. Because the federal government matches state funds spent on Medi-Cal, beefing up the state’s Medi-Cal budget has allowed the state to draw down more money from Washington.

The state then in effect reimburses the insurers for those tax payments through a complicated scheme involving payment of insurers’ administrative costs and the services they provide to Medi-Cal patients.

But Congress in 2005 changed tax law to try to end this practice, and last year the federal government warned California and other states still assessing these taxes that they have to tax all managed care plans, not just those serving Medicaid patients. The rationale: to lessen the financial burden on the federal Medicaid program and tax health insurance providers more equitably.

States with taxes that don’t meet federal guidelines must change or end them, or risk the loss of hundreds of millions of federal Medicaid dollars.

But managed care plans that don’t serve California’s Medicaid patients – and thus would not benefit from reimbursements under the program – are resisting new state taxes. Those added costs would be passed on to consumers, the insurers have said.

A proposal from state health officials and backed by some Democratic state legislators to replace the tax in California with a new tax on all managed care insurers, based on their number of enrollees, was roundly rejected by the state’s insurers and the state’s Republican legislators. In opposing the proposal, the California Association of Health Plans cited excessive costs for its members.

The opposition drew a stinging statement from Diana Dooley, secretary of the California Health and Human Services Agency.

“It is now up to the plans which refused to endorse this proposal, and the Republicans who refused to consider it, to stop drawing lines and start putting solutions on the table,” she wrote.

California isn’t the only state in this mess. Pennsylvania was singled out by the U.S. Health and Human Services’ Inspector General for having a tax that didn’t comply with federal law. The Keystone state hasn’t been able to reach a deal with its insurers, either.

“Discussions are ongoing,”’ was the terse statement from Doug Furness, director of government affairs for the Insurance Federation of Pennsylvania. A spokeswoman for the Pennsylvania health agency overseeing Medicaid declined to comment.

Ohio officials were similarly tight-lipped about negotiations regarding the state’s tax, which, like California’s, can’t pass muster with federal officials. Michigan, as well, is wrestling with a similar health tax that may not be legal.

But other states have been able to change their health provider taxes to comply with the law, said Cindy Mann, a former top official with the Centers for Medicare & Medicaid Services who wrote the agency’s 2014 “guidance letter” warning states about the tax issue.

In California, Democratic lawmakers have proposed raising taxes on tobacco and cocktails in bars and restaurants to help pay for health services, but the proposals stalled in the legislature. Now, health advocates, lobbying groups and health worker unions including the American Lung Association, the California Medical Association and SEIU are pushing to place a $2-per-pack cigarette tax on the November 2016 ballot, which could raise an estimated $1.5 billion in its first year.

In the meantime, the backroom discussions will continue among insurers, legislators and state health officials on how to replace the managed care organization tax’s revenues.

“While it’s possible that this becomes a stalemate, it’s also possible that the health insurance industry acknowledges that a billion dollars in cuts is too much of an apocalypse to not grudgingly come to some kind of compromise,” said Anthony Wright of Health Access, a statewide health advocacy group. “Nobody wants to see what a billion dollars of cuts to our health care system looks like.”

Wisconsin just got approval to implement the new rule, and it will take effect in two other states in January. Meanwhile, more than 8,000 people have lost health insurance in Arkansas -- many who may comply with the rule but not know about it.